Question

Suppose that you won the lottery and received $50 million cash after all taxes were paid.

1. Would your preferences change as a result of this fortunate event? Why or why not?

2. Now that money is largely not a constraint to you achieving your dreams, what constraints would you still face?

3. With regard to price elasticity of demand, would this increase in wealth change the elasticity for goods you consume on a regular basis? Why or why not?

Each answer should have a detailed response to receive full credit.

Answer 1

1) Yes my preference will change due to this fortunate event because I got money which I can use to buy anything. When I have more than enough money than I will try to buy something better than what I usually , I will save more than what usually save and many more. I don't say everything changes but most likely my preference will change in the cost perspective as now I have more Money.

2) Goals are different from preferences. I may have a goal to buy a car of work amount when I have money with me than I will go for a higher end as I can afford. Goals don't change but the cost at which I want to buy will change. There are certain things which even money can't buy. You can't pass an Entrance test of top college because you have money because those run on talent not on Money only thing is that you can afford for a better tution.

3) Yes it will change for Normal goods when the income for me increase than demand of normal goods also go up. In the same way when ever a person income increase than price elasticity of demand also goes up as he is willing to pay more now.